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ANZ Greater China Weekly Insight 2 April 2013

ANZ Greater China Weekly Insight 2 April 2013

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ANZ RESEARCH

GREATER CHINA ECONOMICS WEEKLY INSIGHT
2 APRIL 2013

FEATURE NOTE HONG KONG REAL ESTATE: HEADING TOWARDS A PERFECT STORM? •
2 6 7 8 9 11 12

INSIDE Feature Note Data Preview Week in Review China Liquidity Report Momentum Barometer Forecasts Important Notice

In the past 12 months, Hong Kong’s residential property prices have risen by more than one-fifth despite a series of government tightening measures. While demographic changes and mainland investment have offered new sources of housing demand, low interest rates and tight supply are still the key factors behind the elevated price level. We believe Hong Kong’s property sector is a bubble. Our empirical model indicates current average prices are 24% above fair value. A widening gap between the two will likely trigger a fall of real estate prices. In our view, the strategy of massive land supply and the commitment to build more affordable housing may risk Hong Kong repeating the disastrous situation that occurred in 1997-2003 as poor and irreversible local policy actions in a changing global environment could exaggerate the pace of market correction. Therefore, we need to consider the new housing strategy very carefully.


CONTRIBUTORS
Li-Gang Liu Chief Economist, Greater China LiGang.Liu@anz.com Raymond Yeung Senior Economist Raymond.Yeung@anz.com Hao Zhou Economist, China Economics Hao.Zhou2@anz.com Louis Lam Economist, Greater China Louis.Lam@anz.com

DATA PREVIEW Taiwan: We expect Taiwan's inflation to increase mildly while exports should sustain its moderate growth path over the first two months. China: We believe inflation will moderate significantly in March after the Chinese New Year. WEEK IN REVIEW Taiwan: The central bank held its policy rate unchanged, as widely expected. China: The official PMI rebounded in March, suggesting that growth momentum has been stabilizing, but headwinds remain. CHINA MARKET LIQUIDITY REPORT The PBOC drained liquidity from the open market last week, but market liquidity appeared plentiful even before the end of the quarter, largely due to strong capital inflows. CHART OF THE WEEK China’s March official PMI dispelled growth concerns
China - Official PMI
63 61 59 57 55 53 51 49 47 45 Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar 09 10 10 10 10 11 11 11 11 12 12 12 12 13 Headline PMI New Orders New Export Orders

RESEARCH@ANZ.COM

Sources: CEIC

Greater China Weekly Insight / 2 Apr 2013 / 2 of 13

FEATURE NOTE
HONG KONG’S REAL ESTATE: HEADING TOWARDS A PERFECT STORM? Hong Kong’s property prices surpassed the 1997 peak during the second half of 2012. Despite a slew of policy measures, prices have remained elevated without any apparent sign of declining. Historically, an overheating property sector can result in a significant downturn for an economy. Therefore, we need to evaluate the current situation carefully. IS HONG KONG’S PROPERTY A BUBBLE? From whatever angle, Hong Kong’s property prices have risen too fast. Even though the economy has only expanded by 1.4%, the residential real estate prices have increased by 23% over the last 12 months. As we stated in our previous analysis (ANZ Greater China Insight 11 October 2011), the appreciation of RMB could be a factor behind Hong Kong’s property bubble. However, RMB has only appreciated by a modest 1.1% against HKD in the last 12 months. The surge in real estate prices in all districts in the past few years suggest that Hong Kong’s property is a bubble.
Hong Kong - Property Prices
140 120 100 80 60 40 20 0 1996

Hong Kong - Property Price Rebound by Region
Tuen M un Wo ng Tai Sin/Diamo nd Hill Yuen Lo ng/Tin Shui Wai Wanchai M o ngko k/Tai Ko k Tsui No rth Shatin Kwun To ng Island/Disco very B ay A berdeen/A p Lei Chau Tsuen Wan Tai P o Cheung Sha Wan/Shum West/Sheung Wan/Central Ho M an Tin/ P rince Shau Kei Wan/Chai Wan Hung Ho m/To Kwa Wan Tsim Sha Tsui/Yau M a Tei Causeway B ay/Happy Sai Kung/Tseung Kwan O No rth P o int/Quarry B ay M id-Levels Ko wlo o n To ng/Shek Kip P eak/So uth

Price per sq ft, Mar 2009 (HKD) Increment From Mar 2009 to Oct 201 2

1998

2000

2002

2004

2006

2008

2010

2012

C enta-C ity Leading Index - Raw

C C LI - Adjusted for HKDC NY

0

5,000

10,000

15,000

20,000

Sources: Bloomberg, Centaline, ANZ

To assess how significant the overvaluation is, we have constructed an econometric model to estimate the fair value of Hong Kong’s residential property based on a set of variables that have been well established in previous research (see ANZ Greater China Weekly Insight 25 Oct 2011, IMF (2011) and Leung et al (HKMA 2008)). Our estimates are in line with other similar studies in terms of signs and magnitudes of the parameters (see Annex on page 5). Real interest rates, macroeconomic performance (Hang Seng Index as a proxy) and construction costs are statistically significant factors driving Hong Kong’s property prices. Our model calculates that Hong Kong property prices in 2012Q4 are 24% higher fair value suggesting that there is room for a correction.
Hong Kong - Real Property Price Index Actual vs. Fair Values (Jul 97 = 100, CPI adjusted)

120 110 100 90 80 70 60 50 40 30 20 1994

Hong Kong - Property Price Quarterly Movement by %, 1992Q1-2012Q3
30
27.3 30 25 20 17.2 15 10.9 8.5 8.3 8.8 10 7.8 5 0 Drop Drop Drop 5- Drop 0- Rise 0- Rise 6- Rise 11- Rise 1616-20% 11-15% 10% 5% 5% 10% 15% 20%

25 20 15 10 5 0
1997 2000 2003 2006 Fair Value 2009 2012 Actual
8.1

No. of Quarters

Average Actual-Fair Value Gap, % (RHS)

Sources: CEIC, ANZ Research

Historically, a widening gap between the actual price and fair value increases the risk of a significant price correction. Typical cases are the period of 1997Q4 that ended with a downturn. In fact, between 1992Q2 and 2012Q4, three quarters (1997Q4, 1998Q2, 2008Q4) registered quarterly declines in real property prices of more than 16%. Prior to these declines, we saw a substantial gap between fair value and actual prices. In

Greater China Weekly Insight / 2 Apr 2013 / 3 of 13

FEATURE NOTE
another regression analysis that tracks short-term dynamics, we find that a widening of the gap between actual and fair values would trigger price declines. Therefore, we believe that Hong Kong property prices are now at risk. WHAT ARE THE CAUSES BEHIND THE ELEVATED PRICES? Undoubtedly, rising property prices since 2009 are largely driven by the negative real interest rate regime on the back of US monetary easing. At this stage, Hong Kong’s mortgage interest rates are priced at around 2%, and the low interest environment supports a large buy-rent gap for people who will need a property for selfoccupancy as the interest portion of the monthly mortgage instalment is significantly below the monthly rental payment. This offers a solid and valid proposition for property buyers.
Hong Kong - Mortgage Interest to Rental Ratio
120 100 80 60 40 20 0 2005
Below 100 means the interest expense for a 50sq m flat with 30% down is cheaper than renting the same flat.

60,000 50,000 40,000 30,000 20,000 10,000 0
2006 2007
Hong Kong

Hong Kong - New Property Supply (Units)

120 100 80 60 40 20 0

2008

2009
Kowloon

2010

2011

2012

2001

2003

2005

2007

2009

2011

New Territories

New Flat Available for sales Property Price Index (RHS)

15-year Average Sales

Sources: CEIC, Centaline, ANZ

This low interest regime has been further exacerbated by the problem of below-average supply in recent years. On average, there have been 18,419 units of new flats available for sale over the last 15 years. However, there were just 14,000 new flats available for sale in 2012. This is also a level below the average turnover of 19,000 a year. Since 2007, we have seen a shortage in some years alongside the rise of property prices. Indeed, genuine housing demand needs such as marriage and expansion in family size also put pressures on housing prices. In addition, wealth and economic well-being, plus an appreciating RMB have seen the emergence of this new group of investors in Hong Kong’s property market in the past few years. As China continues to liberalise its capital account and will promote cross border investment, demand from Mainland buyers are also an important factor driving up Hong Kong’s property price.
Hong Kong - Birth, Death, Marriage, Divorce (per 1000 persons)

14 12 10 8 6 4 2 0

8 7 6 5 4 3 2 1 0

35 30 25 20 15 10 5 0

Hong Kong: Estimated Mainlanders' Property Purchase in the Luxury Sector (>HK$12m)

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Death Rate Birth Rate 1 st Marriage (RHS) Divorce (RHS)

2007H1

2008H1

2009H1

2010H1

2011H1

Mainlanders' Transaction as % of total

% of transaction value

Sources: CEIC, ANZ

DIFFERENCE FROM THE 1997 BUBBLE: NEW GOVERNMENT POLICY Over the past 12 months, the government and Hong Kong Monetary Authority (HKMA) have repeatedly heightened the intensity of their demand-side and supply-side measures: Stamp duties: In October 2012, the Government raised Special Stamp Duties (SSD) by another 5 ppts and introduced a new Buyer’s Stamp Duty (BSD) of 15% on non-permanent Hong Kong residents (see ANZ Greater China Weekly Insight 6 Nov 2012 for our analysis). In February 2013, it raised the stamp duty. For properties buyers who already own property, the stamp duty for property under HKD2m became 1.5% of the transaction

Greater China Weekly Insight / 2 Apr 2013 / 4 of 13

FEATURE NOTE
value, compared with HKD100 previously. For all other properties, the rates of stamp duty was doubled, to as high as 8.5%. The government also amended the law on stamp duty, so that it also applied to hotels, commercial properties, car parks and the like, in addition to residential properties. Mortgage tightening: The HKMA has raised the stress test level for mortgage applications by 300bps for the interest rate increase assumption. In addition, a risk weighting floor of 15% for all residential mortgages is required in computing the capital requirement. Mortgages for car park and commercial properties were also tightened. Land supply: In the Policy Address, CY Leung said more land would be rezoned for housing and new areas opened up for development, with 67,000 private units expected to come on to the market over the next 3 to 4 years. A target of some 100,000 subsidised public housing units would be built in the five years from 2018, in addition to the 75,000 already planned for the coming five years. On 28 February 2013, the government announced it will sell 46 residential sites (of which 28 are new sites), expecting to provide about 13,600 flats, nine commercial/business sites which could provide approximately 330,00m2 gross floor area, and one hotel site which could provide 300 hotel rooms. More importantly, the Government has decided to abolish the Application Mechanism from 2013-14 and resume regular land sales. Combining the supply from other sources such as MTR Corporation Ltd (MTRCL) and the Urban Development Authority, total supply of flats could reach 25,800 in FY2013-14. Housing Land Supply in 2013-14 Government Land Sale Programme West Rail property development : Long Ping Station (South) and Yuen Long Station MTRCL property development : Tseung Kwan O Area 86 Package 4 and Tin Shui Wai Light Rail Terminus Projects of Urban Renewal Authority Projects subject to lease modification/land exchange (average of 2003-2012) Private redevelopment projects not subject to lease modification/land exchange (average of 2003-2012) Total
Source: Hong Kong Government

13,600 2,600 3,100 1,800 3,500 1,200 25,800

POLICY IMPACTS WILL BE REVEALED IN YEARS AHEAD The policy impact of the recent policy measures has been very limited. As we have stated in our previous analysis (ANZ Greater China Insight 6 Nov 2012), high SSD will eventually pass-through to Hong Kong’s property prices. The experience of SSD in Nov 2010 suggests that the tax will reduce supply of the market in the short term as sellers will demand for a higher compensation during the lock-in period. The decline in supply should then support higher property prices. When the lock-in period expired (ie November 2011), both buyers and sellers resumed transactions. Basic economics suggests that using a tax to contain rising prices will be counterproductive as the tax will involve deadweight loss. Furthermore, the introduction of BSD will force some non-HKID holders to switch from buying to renting. A welcome boost to rental yields will encourage investment-savvy permanent residents to enter the market and rent the flats to non-permanent residents, offsetting the policy impact and defeating the purpose of controlling demand. As a result, property prices will continue to rise. Special concerns are the government land supply policy and the commitment to build more affordable housing. While many of the recent tightening measures such as macro-prudential policies are new to Hong Kong, the massive increase in land and apartment supply has been regarded as a major reason for the prolonged declining in property prices in the crisis of the 1997-2003 period. With the US economy recovering at a faster pace than expected, we believe the low mortgage rate regime may end earlier. A wrong timing of over-supply may risk Hong Kong suffering a ‘perfect storm’ that will potentially result in a significant impact on local real estate and on the overall domestic economy. The government needs to consider its housing strategy very carefully.

Greater China Weekly Insight / 2 Apr 2013 / 5 of 13

FEATURE NOTE

ANNEX: Econometric Models on Hong Kong Property Prices Beta (t-stat) Real Interest Rate -2.285 (-2.983) Income Level: ANZ: Hang Seng Index (real) IMF/HKMA: Real GDP per capita Construction cost: ANZ: Material costs IMF: Building tender price HKMA: Residential investment deflator Supply side: ANZ: New flat completion IMF: Land supply (5Q lag) HKMA: Land supply (2Q lag) Adjusted R-squared Sample period
Source: ANZ, IMF, HKMA

ANZ Model

IMF

HKMA (Leung et al. 2009) -3.087 (-2.335) 0.714 (1.871)

-1.600 (-2.331) 1.492 (6.510)

0.7245 (3.276)

0.5263 (3.2154)

0.479 (7.336)

0.023 (8.751)

-0.1592 (-1.2608)

-0.800 (-7.336)

-27.138 (-3.048)

0.966 1992Q1-2012Q4 1997Q3-2011Q2

0.856 1986-2007

Note: The co-integration model is estimated by dynamic ordinary least square method with heteroskedasticityautocorrelation consistent (HAC) standard errors. Variables are expressed in natural log terms, except for real interest rate. The leads and lags of the dynamic terms are not shown in the table.

Li-Gang Liu, Raymond Yeung

Greater China Weekly Insight / 2 Apr 2013 / 6 of 13

DATA PREVIEW
TAIWAN MARCH INFLATION AND TRADE (8 APRIL)
CPI, y/y WPI, y/y Exports, y/y Imports, y/y Trade Balance, USD bn
Source: ANZ, Bloomberg

ANZ 2.20% -2.51% 3.01% 4.58% USD2.09bn

Market 1.75% 3.0% 4.4% USD2.19bn

Last 2.97% -2.2% -15.8% -8.5% USD0.92bn

We expect Taiwan's inflation to increase mildly (2.2% y/y) on an increasing energy price, compared to the average CPI of 2.1% over the first two months. As the electricity rate was raised last June, the first half of 2013 will continue to see a low base effect from energy costs. However, as food price rises have been subsiding, near-term inflationary pressure remains modest. On the trade side, the recent exporter survey indicates a positive outlook in March, suggesting that Taiwan's exports can sustain the moderate growth achieved during the first two months (January-February combined: 2% y/y). An improving US economy and Chinese demand should continue to support Taiwan's trade, although we have seen a sharp contraction of export orders from Japan that may offset some of the growth momentum. Raymond Yeung CHINA MARCH INFLATION (9 APRIL)
CPI, y/y PPI, y/y
Source: ANZ, Bloomberg

ANZ 2.4% -2.1%

Market 2.5% -1.9%

Last 3.2% -1.6%

We expect China’s inflation to moderate significantly in March after a surge in February inflation amid the Chinese New Year. We forecast March CPI to have risen 2.4% y/y, down from 3.2% in the prior month. The PPI inflation should decline further to -2.1% in March, versus -1.6% previously, reflecting weak commodity prices after the Chinese New Year. While inflation could ease sharply in March, we hold our view that the overall inflation momentum is still on the rise and is likely to reach 4% in early Q3. Li-Gang Liu, Hao Zhou GREATER CHINA ECONOMIC DATA CALENDAR
DATE 02 Apr 02 Apr 03 Apr 03 Apr 03 Apr 03 Apr 08 Apr 08 Apr 08 Apr 08 Apr 08 Apr 08 Apr 09 Apr 09 Apr 10 Apr 10 Apr 10 Apr COUNTRY Hong Kong Hong Kong China China Hong Kong Taiwan Taiwan Taiwan Taiwan Taiwan Taiwan Hong Kong China China China China China DATA/EVENT Retail Sales - Value (y/y) Retail Sales - Volume (y/y) Non-manufacturing PMI HSBC Services PMI PMI Foreign Reserves CPI (y/y) WPI (y/y) Trade Balance Exports (y/y) Imports (y/y) Foreign Reserves CPI (y/y) Producer Price Index (y/y) Trade Balance Exports (y/y) Imports (y/y) PERIOD Feb Feb Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar MARKET 17.7% 14.7% ----1.80% -USD2.12bn 2.9% 4.3% -2.5% -1.9% USD15.30bn 10.0% 4.4% LAST 10.5% 10.4% 54.5 52.1 51.2 USD404.08bn 2.97% -2.20% USD0.92B -15.8% -8.5% USD304.8bn 3.2% -1.6% USD15.25bn 21.8% -15.2% 9:30 9:30 10:00 10:00 10:00 TIME (HK/SG) 16:30 16:30 9:00 9:45 10:30 16:20 8:30 8:30 16:00 16:00 16:00

Source: Bloomberg

Greater China Weekly Insight / 2 Apr 2013 / 7 of 13

WEEK IN REVIEW
TAIWAN KEEPS RATE ON HOLD AS EXPECTED Please refer to ANZ Quick Reaction - Taiwan Keeps Rate On Hold As Expected, published on 28 March 2013 for more details. • • • • Taiwan’s central bank (CBC) held its policy rate at 1.875% today as widely expected. CBC deems the current policy rate level and M2 growth target (2.5-6.5%) appropriate for maintaining price and financial stability as well as supporting growth. Our view remains that as growth momentum and inflationary pressure accelerate in 2013Q3, we expect a rate hike in December 2013 at the earliest. The CBC believes that mortgage tightening measures it had earlier launched are effective. Raymond Yeung CHINA’S MARCH OFFICIAL PMI DISPELLED GROWTH CONCERNS Please refer to ANZ Quick Reaction - China's March Official PMI Dispelled Growth, published on 1 April 2013 for more details. • The official Purchasing Manager’s Index (PMI) rebounded in March, after a weak PMI reading in February owing to the Chinese New Year effect. While the rebound of sub-indices appears broadbased, it is still much lower than the average gain seen in past years. Meanwhile, average Q1 PMI is very close to the level in Q4 and only slightly higher than the benchmark level of 50, suggesting that the growth momentum has been stabilizing, but headwinds remain. The weak PMI numbers, plus the lower-than-expected trade statistics in neighbouring economies (ie. Taiwan and Korea), indicate that China’s March activity and trade data (to be released mid-April) could surprise the market on the downside. We maintain our forecast that China’s economy will grow 8.1% y/y in Q1, supported by fast investment growth and a rebounding property market. However, consumption appears to have been worse than we expected, largely owing to falling government consumption. It appears that the efforts by the new government to crack down on corruption and to moderate official extravaganza may have started to dampen retail sales. Li-Gang Liu, Hao Zhou

WEEK IN REVIEW
DATE 26 Mar 26 Mar 26 Mar 27 Mar 27 Mar 28 Mar 28 Mar 28 Mar 28 Mar 28 Mar 28 Mar 01 Apr 01 Apr 01 Apr 01 Apr
Source: Bloomberg

COUNTRY Hong Kong Hong Kong Hong Kong Taiwan Taiwan China Hong Kong Taiwan Hong Kong Hong Kong Hong Kong China China China Taiwan

DATA/EVENT Exports (y/y) Imports (y/y) Trade Balance Coincident Index (m/m) Leading Index (m/m) Industrial Profits YTD (y/y) Government Monthly Budget Benchmark Interest Rate Money Supply M1 (y/y) Money Supply M2 (y/y) Money Supply M3 (y/y) Leading Index Official Manufacturing PMI HSBC Manufacturing PMI HSBC Manufacturing PMI

PERIOD Feb Feb Feb Feb Feb Feb Feb Mar-28 Feb Feb Feb Feb Mar Mar Mar

CONSENSUS 4.4% -2.5% -HKD36.2bn ----1.875% ----51.2 51.6 --

ACTUAL -16.9% -18.3% -HKD34.0bn 0.3% 1.1% 17.2% -HKD6.2bn 1.875% 13.6% 8.5% 8.5% 100.23 50.9 51.6 51.2

PREV 17.6% 23.9% -HKD27.5bn 0.6% 1.3% 5.3% HKD41.9bn 1.875% 20.2% 14.1% 14.1% 100.50 50.1 50.4 50.2

Greater China Weekly Insight / 2 Apr 2013 / 8 of 13

CHINA ONSHORE MARKET LIQUIDITY REPORT
1,000 800 600 400 200 0 -200 -400 -600 -800 -1,000
Liquidity Withdrawal

China - PBoC Weekly Open Market Operations (RMB bn)
Liquidity Injection

China - Reverse Repo Operations (RMB bn)
1,000 800 600 400 200 0 -200 -400 -600 -800 -1,000 03 17 01 15 29 12 26 10 24 07 21 04 18 04 18 Sep Sep Oct Oct Oct Nov Nov Dec Dec Jan Jan Feb Feb Mar Mar
Reverse Repo C umulative Net Injection Rev. Repo Matured Liquidity Withdrawal Liquidity Injection

10 24 08 22 05 19 03 17 31 14 28 11 25 11 25 Sep Sep Oct Oct Nov Nov Dec Dec Dec Jan Jan Feb Feb Mar Mar
C B Bill Matured C B Bill Net Repo Matured Repo Reverse Repo Rev. Repo Matured

China - 7-day Repo Rate
5.0 4.5 4.0 3.5 3.0 2.5 2.0 Sep 12
4.5 4.0 3.5 3.0 2.5 2.0 Jul 11 Sep 11

China - Government Bond Yields

Oct 12

Nov 12

Dec 12

Jan 13

Feb 13

Mar 13

Nov 11

Jan 12

Mar 12

May 12

Jul 12

Sep 12

Nov 12

Jan 13

Mar 13

1-year

3-year

7-year

Sources: Bloomberg, CEIC, ANZ

NO LIQUIDITY SQUEEZING BEFORE THE QUARTER-END The People’s Bank of China (PBOC) conducted RMB52bn 28-day repos, and drained about RMB57bn liquidity from the open market for the whole week. The market liquidity appeared very plentiful even before the end of the quarter, largely due to strong capital inflows. STATE BANKS ACCELERATED LOAN EXTENSION LAST WEEK China’s big four banks’ new loans accelerated in the week ended 24 March. According to earlier reports, the big four banks extended RMB144bn of new loans in the first 17 days on March. As of 24 March, the amount has risen by RMB83.8bn to RMB227.8bn, suggesting that the loans are accelerating. CHINA TIGHTENS REGULATIONS ON (WMPS) • The China Banking Regulatory Commission (CBRC) said last week that banks must clearly link wealth management products (WMPs) with specific assets. The notice also said that banks must disclose who will ultimately use the funds and for what purpose, and that each product must be audited. CBRC’s statement also said that outside of the formal bond market, no more than 35% of a bank's total issued WMPs can be invested in non-standard debt (not traded in the inter-bank and exchange markets), including loans, banker’s acceptance draft, accounts receivables and letter of credit. At a news conference last week, ICBC President Yang Kaisheng said that the portion of ICBC’s outstanding WMPs invested in such a way might be slightly in excess of the CBRC's requirements.

We believe that this new regulation was rumoured for the last week. Banks typically pool funds raised by wealth-management products and sometimes invest the money in poorly disclosed assets or projects, leading to a lack of clarity about the underlying assets. In addition, many banks issue short-tenor WMPs on a roll-over basis, while the assets are long-term, which has created a maturity mismatch problem. Under the new requirements, the regulator will require banks to clearly link WMPs with specific assets. The co-operation between commercial banks and the securities firms has emerged after the CBRC tightened the co-operation between banks and trust companies. In this model, commercial banks normally transfer the off-balance sheet assets to securities firms to escape from regulation, while the securities firms get liquidity from the banks. The new regulation will tighten this kind of shadow-banking activity. Li-Gang Liu, Hao Zhou

Greater China Weekly Insight / 2 Apr 2013 / 9 of 13

MOMENTUM BAROMETER
WEEKLY MOMENTUM • Activity momentum is mixed in the region. China’s industrial profits growth grew steadily in the first two months of 2013. However, Ningbo Port container throughput data softened in March. In Hong Kong, trade figures in February disappointed. • The CNY continued to modestly appreciate against the USD. IRS curve flattened slightly as the central bank drained liquidity from the market. In the offshore market, Hong Kong’s RMB deposits reached another record high in February. REAL ACTIVITY MOMENTUM China’s industrial profits continue to grow China’s industrial profit in the first two months of 2013 increased 17.2% y/y, a tick lower than 17.3% in December, indicating that the recovery in the industrial sector has extended into the January and February. Industrial sales rose 13.1% y/y over the two month period. According to the National Bureau of Statistics (NBS), within the 41 industries, 30 reported increases in profits, 8 reported declines, 2 turned to profits after losses, while 1 saw a smaller loss.
25 20 15 10 5 0 -5 -10 Mar Apr May Jun 12 12 12 12 Jul 12 Aug Sep 12 12 Oct Nov Dec Jan 12 12 12 13 Feb 13

China - Industrial Profits (y/y)

China’s Ningbo Port throughput data softened Container throughput growth at Ningbo Port slowed to 5.3% y/y in March, compared with 9.4% in February and 11.5% in January, according to the company. The sluggish port throughput growth suggests that China’s March trade data (due on 10 April) may surprise on the downside.
25 20 15 10 5 0 -5

China - Ningbo Port Container Throughput (y/y)

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar 12 12 12 12 12 12 12 12 12 12 12 12 13 13 13 Container Throughput, y/y

Hong Kong’s February trade disappointed Exports fell 16.9% y/y in February, compared with a 17.6% gain in January and market consensus of a 4.4% increase. Imports also dropped 18.3%, from a 23.9% increase, and much worse than market expectation of -2.5%. While the weak data in February mainly reflects the distortions caused by the timing of the Chinese New Year, the degree of decline was much more severe than expected. It is also inconsistent with the strong print from China’s February trade data.
50 40 30 20 10 0 -10 -20 -30 -40 -50 Aug 10 Nov 10

Hong Kong - Trade Developments

Feb 11

May 11

Aug 11

Nov 11

Feb 12

May 12

Aug 12

Nov 12

Feb 13

Trade Balance, HKD bn

Exports, y/y

Imports, y/y

Sources: CEIC, Bloomberg, ANZ

Greater China Weekly Insight / 2 Apr 2013 / 10 of 13

MOMENTUM BAROMETER
MARKET MOMENTUM CNY continued to appreciate modestly The CNY spot rate strengthened modestly against the USD in March as the People’s Bank of China (PBOC) continued to set a lower fixing. The spot rate remains near the bottom of the +/-1% trading band. Meanwhile, the spread between the onshore CNY and offshore CNH spot rates has narrowed to within 50bps at the time of writing.
6.45 6.40 6.35 6.30 6.25 6.20 Feb 12

USD/CNY

Apr 12 Spot

Jun 12

Aug 12

Oct 12

Dec 12

Feb 13 Fixing

Apr 13

Trading band

China’s IRS curve flattened slightly as the PBOC continued to drain liquidity from the open market China’s 1-year interest rate swap against the 7-day repo rate rose after the Chinese New Year, as the PBOC started to drain liquidity via repo operations. Meanwhile, the 5-year IRS remained relatively stable. As a result, the IRS curve has flattened. As the central bank continues to drain liquidity from the market, short term interest rates may rise, and as a result, the IRS curve may flatten further.

China - IRS 1s5s Spread (bps)
70 60 50 40 30 20 10 0 -10 -20 Mar Apr May Jun 12 12 12 12 Jul Aug Sep Oct Nov Dec Jan Feb Mar 12 12 12 12 12 12 13 13 13

Hong Kong’s RMB consecutive month

deposits

grew

for

fifth
700 600 500 400 300 200 100 0 Jun 09

Hong Kong - RMB Deposits and Cross-Border Trade Settlement

Hong Kong’s RMB deposits increased 4.4% to a record high RMB651.7bn in February. Due to the CNY holidays, RMB cross-border trade settlement declined by RMB46.8bn to RMB221.7bn.

12 10 8 6 4 2 0

Oct 09

Feb 10

Jun 10

Oct 10

Feb 11

Jun 11

Oct 11

Feb 12

Jun 12

Oct 12

Feb 13

Deposit, RMBbn Trade settlement amount, RMBbn RMB as % of Total Deposits (RHS)

Sources: CEIC, Bloomberg, ANZ

Greater China Weekly Insight / 2 Apr 2013 / 11 of 13

FORECASTS
y/y, unless otherwise noted Sep-11 Real GDP China Taiwan Hong Kong 9.2 3.53 4.4 Aug-12 Consumer Price Index China Taiwan Hong Kong Producer Price Index China Unemployment Rate, % Taiwan Hong Kong Exports China Taiwan Hong Kong Imports China Taiwan Hong Kong Trade Balance China, USD bn Taiwan, USD bn Hong Kong, HKD bn PMI and Export Orders China Manufacturing PMI Taiwan Export Orders Industrial Production China Taiwan Electricity Production China Retail Sales China Taiwan (Commercial Sales) Hong Kong M1 Growth China Taiwan (M1 B) Hong Kong M2 Growth China Taiwan Hong Kong 2.0 3.43 3.8 -3.5 4.27 3.2 2.7 -4.0 0.6 -2.6 -7.9 0.9 26.7 3.43 -36.0 49.2 -1.53 8.9 1.39 2.7 13.2 -1.19 4.6 4.5 2.73 8.7 13.5 3.69 8.6 Dec-11 8.9 1.21 3.0 Sep-12 1.9 2.96 3.8 -3.6 4.28 3.3 10.0 10.3 15.2 2.3 1.2 14.9 27.7 4.1 -45.2 49.8 1.91 9.2 2.97 1.5 14.2 -1.50 9.5 7.3 3.3 10.3 14.8 4.0 11.0 2006 Current Account, % of GDP China Taiwan Hong Kong Foreign Reserves, USD bn China Taiwan Hong Kong Government Fiscal Surplus/Deficit, % of GDP China Taiwan Hong Kong (FY ending in March) 8.5 7.0 12.1 1,066 266 133 -1.0 0.1 3.9 Mar-12 8.1 0.59 0.7 Oct-12 1.7 2.34 3.8 -2.8 4.28 3.4 11.6 -1.9 -2.8 2.4 -1.8 3.3 32.0 3.3 -42.7 50.2 3.16 9.6 4.83 6.4 14.5 -0.68 3.9 6.1 3.6 13.1 14.1 3.3 10.0 2007 10.1 8.9 12.3 1,528 270 153 0.2 0.3 7.5 Jun-12 7.6 -0.12 1.1 Nov-12 2.0 1.59 3.8 -2.2 4.24 3.4 2.9 0.8 10.5 0.0 0.1 9.0 19.6 3.4 -44.1 50.6 11.12 10.1 5.71 7.9 14.9 1.66 9.5 5.5 3.7 15.3 13.9 3.3 11.0 2008 9.3 6.9 13.7 1,946 292 183 -0.8 -0.5 0.1 Sep-12 7.4 0.73 1.4 Dec-12 2.5 1.61 3.8 -1.9 4.21 3.3 14.8 8.9 14.4 6.0 1.6 11.9 31.6 4.1 -48.0 50.6 8.51 10.3 2.05 7.6 15.2 1.49 9.1 6.5 4.9 15.9 13.8 3.7 12.1 2009 4.9 11.4 8.6 2,399 348 256 -2.8 -3.5 1.6 Forecasts Dec-12 Mar-13 7.9 3.72 2.5 Jan-13 2.0 1.13 3.0 -1.6 4.20 3.4 25.2 21.6 17.6 28.8 22.4 23.9 29.1 0.5 -27.5 50.4 17.95 19.05 7.80 10.5 15.3 4.0 20.2 15.9 3.0 14.1 2010 4.0 9.3 5.5 2,847 382 269 -2.5 -2.3 4.2 8.1 2.94 3.8 Feb-13 3.2* 2.97* 4.4* -1.6* 4.16* 3.4* 21.8* -15.8* -16.9* -15.2* -8.5* -18.3* 15.3* 0.9* -34.0* 50.1* -14.47* 9.9* -11.45* 3.4* 12.3* -6.00* 14.9 9.5* 5.66* 13.6* 15.2* 3.53* 8.5* 2011 2.8 8.9 5.3 3,181 386 285 -1.8 -1.9 3.8

2013 8.1 3.60 3.7 Mar-13 2.4 2.02 3.5 4.14 3.2 7.1 6.7 16.2 1.5 8.3 12.0 14.7 2.2 -38.0 50.9* 1.86 9.8 1.02 12.6 1.48 6.1 2012 2.6* 10.5* 9.3 3312* 403* 317* -1.5 -2.6 3.2

1 Apr-13 Foreign Exchange Rate USD/CNY USD/TWD USD/HKD Policy Interest Rate China PBOC 1-year Ledning Rate Taiwan CBC Discount Rate Hong Kong Base Rate Shaded cells and column refer to forecast; *Indicates actual released data or YTD Sources: CEIC, Bloomberg, ANZ Research 6.208 29.879 7.764 6.00 1.875 0.50

Jun-13 6.20 6.00 1.875 0.50

Forecasts Sep-13 Dec-13 6.15 6.25 1.875 0.50 6.10 6.25 2.000 0.50

Mar-14 6.05 6.50 2.125 0.50

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